The relationship between supply and demand is one of the key drivers of pricing in any business, and insurance is no different. If a particular segment of the market, like cyber, is in high demand then it’s only sensible to expect the mechanics of the marketplace to click into gear: more insurers enter the marketplace offering more options and prices are pushed down.
But, insurance is different from other businesses. Yes, demand for cyber policies has increased and premiums have consequently decreased but, at the same time, ransomware demands are increasing and claims costs are also going up. Insurance companies are facing higher cyber costs than ever before but are being forced to drop their prices to compete in a fiercely competitive marketplace.
“It is counterintuitive that the premium is as low as it is given the fact that the costs of claims are increasing,” says Jeremy Barnett, senior vice president of marketing at NAS Insurance. “Premium is artificially down. It is not low because the cost of claims or loss ratios have reduced, prices have dropped because there are a lot of new market entrants undercutting traditional markets to win business in their first year in the space.”
Companies funded with venture capital or private equity are willing to ride out a period of time of winning the business unprofitably in order to gain long term traction in the space, but, claims are claims and if they continue to be more expensive, it’s going to be difficult to sustain that type of business model if sufficient premium has not been collected.
“If a carrier or MGA’s portfolio does not create a diverse enough premium base from multiple products and you are relying on cyber to sustain you and you have losses, you will not have enough premium to carry you through the increasing cost of claims,” Barnett says. “The industry will have its shake-up but right now it is a bit of a gold rush and a lot of people are getting into it without necessarily having the expertise to manage it.”
“It may be a short-lived gold rush but, ultimately, the companies that have long-standing relationships, know how to manage a claim and have the ability to weather an increase in claims activity and severity will be positioned for long-term success in this space.”